Exercise 11-7 (Static) Depreciation methods; partial periods [LO11-2] On March 31, 2021, Susquehanna Insurance purchased an office building for $12,000,000. Based on their relative fair values, one-third of the purchase price was allocated to the land and two-thirds to the building. Furniture and fixtures were purchased separately from office equipment on the same date for $1,200,000 and $700,000, respectively. The company uses the straight-line method to depreciate its buildings and the double-declining-balance method to depreciate all other depreciable assets. The estimated useful lives and residual values of these assets are as follows: Service Life Residual Value Building 30 10% of cost Furniture and fixtures 10 10% of cost Office equipment 5 $30,000 Required: Calculate depreciation for 2021 and 2022.

Depreciation is the accounting method of allocating cost of an asset over its useful life.

It can be calculated in different ways.

The data given is

                                             Useful   Residual              Year

                                            Life          Value             2021             2022

Building                                 30      10% of cost      180,000         240,000

                                                           8,000,000

Furniture and fixtures          10        10% of cost     1800,000    2040,000

                                                          120,000

Office equipment                 5          $30,000          210,000     196,000

Note: The first year's depreciation for the three assets is lesser due to the depreciation calculated for 9 months from April to December and the next year's depreciation is for 12 months.

Depreciation Straight Line Method= Cost - Salvage Value/ Useful Life

A. Depreciation Building Straight Line Method= $ 8,000,000- $800,000/ 30= $ 240,000

The depreciation expense using the straight line method does not change unless the salvage value is reached.

B. Straight Line Rate= 100%/ useful Life

Straight Line Rate for furniture= 100%/ useful Life= 100%/10= 10 %

Straight Line Rate  Office Equipment= 100%/ useful Life= 100%/ 5= 20 %

Double Declining Method = 2 * Straight Line Rate

Double Declining Method Furniture= 2 * Straight Line Rate= 2*10%= 20%

Double Declining Method  Office Equipment= 2 * Straight Line Rate= 2*20%= 40%

In double declining method the rate is multiplied to the cost to get the depreciation expense.  20 % of $ 12,000,000= $ 2400,000

Each year the rate is multiplied with the remaining book value after deducting the depreciation expense from the cost as $ 12,000,000- $ 1,800,000= $ 10,200,000

Next years depreciation will be $ 10,200,000 * 20%= $ 2040,000.

This will be added in the original depreciation expense $ 1800,000 + $ 2040,000 = $ 3840,000 and deducted from cost to get the book value. $ 12,000,000- $ 3840,000 = $ 8160,000

Again rate will be multiplied and each years depreciation will be calculated similarly.

It has been summarized in the table below.

    Years        Dep Rate               Dep Expense       Accu. Dep.          Book

                                                                                                            Value

a. 2021           20% 12,000,000          2400,000     1800,000    $ 10,200,000  

b. 2022         20% $ 10,200,000        2040,000     3840,000    $ 8160,000

Office Equipment

    Years        Dep Rate               Dep Expense       Accu. Dep.          Book

                                                                                                            Value

a. 2021           40% 700,000          280,000           210 ,000       $ 490,000  

b. 2022         40% $ 490,000        196,000             406,000    $  294,000

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